Day 28 – Q 2.Has demonetisation led to widening of India’s tax base? Critically evaluate.
2. Has demonetisation led to widening of India’s tax base? Critically evaluate.
क्या विमुद्रीकरण ने भारत के कर आधार को विस्तृत किया है? समोचनात्मक मूल्यांकन करें।
INTRODUCTION
Demonetization refers to declaration of certain currency as no more a legal tender, i.e. those currency cease to have any value and incapable for exchange. India carried out Demonetization in November 2016, the third time after 1954 and 1978. Also worldwide demonetization has been carried out by various countries like by Europe while introducing Euro as the common currency, US killed $500 in 1969 etc.
BODY
Demonetization was not an abrupt measure, it was carried out as a continuation of the series of measures like –
- SIT
- Income declaration scheme ( 40% penality )
- Black money imposition tax act,2015
- Constituting Multi agency group
- Benami Transaction Bill , 2015
- DTAA with various countries
- Automatic Exchange — Switzerland
- cashless transactions
- Jan Dhan Yojana.
It was carried out due to the multiple reasons and with the hope of countering issues like –
- Drastically growing PARALLEL ECONOMY ( black money, counterfeit currency, funding for anti-social elements )
- India’s cash transactions consisted of 14% in comparison to 5% of the Developed countries.
- 45% of India’s output is from informal sector.
- To lead to positive rate cuts and decrease Inflation.
- To curb drug trafficking, money laundering , hawala networks, benami properties, real estate and gold volatilities.
It was perceived that Tax base increased in parallel with various other benefits out of Demonetization in the following way –
- Due to immediate inclusion of money in formal sector, i.e Banks, Insurance etc – a lot of unaccounted money came into foray.
- IT returns have increased by 1.26 crore, hence it has increased tax base.
- Suspicious accounts lead IT officials – crack down on illegal properties, which forced owners to face tax penalties.
- Direct tax collections from personal Income tax increased by 34% and corporate tax by 42%
- Economic Survey also points to increase in tax files by 10% in the last year.
- Digitalization of Economy helped in financial inclusion and increased accountability.
- As black money got converted into white, huge increase in investments could be seen.
- Operation Clean Money was launched simultaneously to find the relations of large deposits of taxes and incomes.
- It improved voluntary Direct tax compliance, i.e 26% of net increase in number of taxpayers base.
- Promotion of digital economy leads to increase in the tax to GDP growth.
However, with the various benefits of Demonetization on the tax rate, the various negatives could be seen with time, it could directly or indirectly reduce the tax base and deviate from the initial perception of Demonetization. The issues were –
- Many small and medium business enterprises saw decline in business as they faced the wrath of Cash crunch.
- Demonetization is not the most prominent reason for increase in tax base, whereas many other initiatives like GST are at the forefront.
- The amount returned to the bank has been 99% of the actual amount of Rs 500 and Rs 1000 notes before demonetization.
- The demonetization through it increased digital transaction but it has not sustained and again cash to GDP ratio is increasing.
- It was found that various illegal modes were used for depositing money.e.g – Use of Jan Dhan accounts.
- Demonetization lead to decrease in production (IIP index) leading to slower growth rate and thus decrease in tax payments.
CONCLUSION
Although Demonetization was carried out with lot of hope with tacking most of the negatives related to Indian economy considering it to be panacea for growth in the long term. However; improper planning, poor targeting and faulty implementation has brought lot of negatives to the surface. The tax base is still on the lower side, it is important for India to focus on Laffer curve by carrying out the following measures –
- First reduce income tax so that incentive to avoid tax is reduces.
- Decrease onerous & prohibitive tax rate during purchase of property.
- Reduce CGT in property.
- Morality has no place in taxation, so put in place a efficient legal revenue system in place.
Hence, Increase in tax base is a long term process and can be carried out in the long term by multi-dimensional strategy and not hoping for a “One panacea for all ” approach.
Best Answer : JYOTI SINGH
